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IRS Audits of 403(b) Plans — Insights and Best Practices

This article originally ran on August 25, 2015.

By Diane Capone

(Editor’s Note: While the Communications Committee has commented in a recent article about the IRS Audits Presentation at the NTSA Conference, Diane Capone’s article offers additional insights to our readers; thus bears repeating and enhancement of previous points.) 

A panel at the recent 2015 NTSA 403(b) Summit with experience regarding IRS audits provided their insight and best practices. Some very helpful guidance and real-life experience was shared with attendees and the highlights are presented here.

How are plans selected for IRS audit? There are a number of possibilities; among them, non-response to Employee Plans Compliance Unit letter projects; targeted examination of an industry such as hospitals; random selection; and referral from other agencies.

After an IRS audit, some best practices that will help in ongoing plan administration were identified 
by the panel which included an employer, TPA and accountant as best practices to put in place:

  • Revise practices and procedures going forward based upon lessons learned during the audit
    • review & adjust administrative Procedures and monitoring
    • establish written procedures for operations particularly correction of errors
    • establish procedures for maintenance and review of plan documents
    • self‐audits
  • Minimize audit risk with good internal controls, processes and procedures
  • Review annually for any law changes and amend the plan and adjust administrative processes

Here are some of the common audit areas and operational problems that were found during an IRS Audit:

  • Failure to follow written plan — problem for all plans
    • payroll/HR system not matched to the document requirements
    • document is changed and no longer matches operations
    • misunderstanding of document provision
  • Elective deferral errors
    • not providing “universal availability”
    • must provide effective opportunity notice annually
  • Contribution errors
    • elective deferrals exceeding  the basic limit ($18,000 for 2015)
    • incorrect 15 year of service catch-up calculation
    • 5-year post-severance contribution
      • this must be in the written plan document and must not be elective
      • important to watch the 415 limit for the year
  • Other errors — the usual suspects
    • timely deposit of employee contributions
    • plan loans properly administered
    • hardship distributions not properly documented
    • improper transfers and distributions
The panel also provided some tips on how to prepare and manage an IRS audit and indicated that the length of the audit is directly influenced by timely furnishing of the requested information and open communication with the IRS auditor.

Further resources that provide information are available on the IRS website and include, for example, audit guidelines, audit process guide, and the 403(b) Fix-it Guide. The IRS also provides Employee Plan Examination Process Flowchart to help in understanding the steps involved in the audit.

Diane D. Capone, CEBS, TGPC is a member of the NTSA Communications Committee and Sr. Retirement Compliance Consultant for Lincoln Investment, Registered Investment Advisor, Broker/Dealer, Member FINRA/SIPC.

Please note that this article is for general informational purposes only and is not intended to be taken as legal advice or a recommended course of action in any given situation. Readers should consult their own legal advisor before taking any actions suggested in this article. 

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.

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